The Weekend Edition # 16

Welcome to another issue of the Weekend Edition. 

Thank you to all who’ve read and subscribed to the newsletter this week!

Now, let’s grab a cup of coffee ☕️, while we take a look at what happened in the markets this week. 

Here’s what we cover:

• Market Recap - No one blinked!

• Macro of the Week - Tapering & Emerging Markets

• Earnings through Macro - Corteva, Simon Property, Square, Martin Marietta, Travel Stocks

• Around the Markets - Pfizer, Square

• The Week Ahead - Rivian IPO & More Earnings

• Closing Thoughts

Let’s dive in ⬇️

Market Recap - Nov 1 - Nov 5, 2021

Happy November! The weather’s becoming colder but, the markets remain as hot as ever. With the FOMC meeting taking place on Wednesday this week, and the anticipation of the tapering announcement, most people were sure that markets would be choppy. But, Fed Chair Powell had a “dovish” tone as the markets like to call it. Tapering was announced at the $120B per month level as expected but, the markets didn’t even blink. In fact, just the opposite.

Markets on Wednesday ⬇️. The “take-off” was at 2pm, right after the Fed Announcement.

Chair Powell put everyone at ease about not raising rates any time soon. He also stressed that we’re not seeing a wage price spiral but rather inflation caused by temporary factors, as he’s always maintained. If you ask me, the press conference was an economics lesson and JPow seems to be getting smoother with every call. It’s about time too, since his re-nomination still hangs in the balance.

Reaching maximum employment still remains an important factor. The Friday Jobs data showed more improvement in that direction with the Unemployment Rate coming down to 4.6% and 531k more jobs being filled.

The largest jump in jobs were in the hospitality and leisure sector, which is a good sign that the economy is re-opening. However, the labor force participation rate didn’t move from the previous month and this remains puzzling. As the economy normalizes, and the spread of Covid decreases, there should be fewer reasons for people to still stay home.

Oil still remains the commodity in focus. While we had a slight dip during the week because of the increase in the oil inventory report, prices have bounced back above $80/bbl.

The OPEC+ held their meeting on Thursday and they’re not budging on the level of oil production just yet. According to them, the current energy crisis is because of NatGas and Coal and not Oil. So, increasing production to bring down prices now, will result in an oversupply in Q1, 2022. Although we are still below pre-pandemic levels in terms of supply, the level of global demand is also yet to catch up.

Macro for the Week - Tapering & Emerging Markets

So now that there’s a tapering plan in the US, how does this affect the rest of the world?

We already know that as the tapering begins, bonds yields will start to go up and bond prices will start to come down. This will make long-term treasury bonds in the US attractive to foreign investors.

Emerging Markets (EM) always have a higher yield on bonds because they have a higher risk rating. So since the US bond yields declined over the past two years, investors looking for better yields invested partly in the EMs.

This is a major boost for many Emerging Market economies, particularly if they have external debt, which is usually in USD. The funds flowing from the bond investors are usually in US Dollars, which adds to the foreign currency reserve of the countries. This foreign currency can then be used to pay the external debt owed by the EM country.

According to the Institute of International Finance, fund flows to EMs, excluding China is supposed to reach $850B in 2021. But, there’s already been some withdrawal over the last couple of months. ⬇️

Looking forward to the 2022, some of this is bound to be reallocated to the US or other countries with strong credit ratings and rising bond yields. However, the consensus is that EMs will not experience a “taper tantrum”, as they did during the previous episode in 2013.

One argument for this is that the larger EM economies are projected to have a strong recovery in 2022, with solid GDP growth rates and this will stabilize the level of foreign investments. The countries are therefore, less dependent on the fund inflow. The EMs are also running a lower current account deficit than they did in 2013, which puts them in a stronger position.

Here’s a nice chart from the Visual Capitalist that shows the projected GDP for the world in 2022. The global projection is 4.4%.

Earnings of the Week - thru a Macro Lens

Berkshire Hathaway (BRK) reported today and Mr. Buffett is reportedly sitting on $149.2B in cash. Nice bit of change he’s got there… waiting to buy the dip!?! 😂

The company grew +18% ex-investment results. The gain/loss on investments skews the results and shows a massive drop! But, I do like this company.

Supply-side, Inflation and Margins

• Corteva reported inflationary pressures in Crop Protection seeing cost headwinds of up to $150million. Like everyone else, they believe inflation will continue well into 2022. So food inflation is going nowhere anytime soon.

• While inflation is still plaguing the construction sector, Martin Marietta has a done a good job of increasing their pricing of aggregates and believe they can continue with accelerating the price next year. While good for the company, this isn’t exactly good for the end user. There’s no doubt, this company will now get a bigger boost from the infrastructure bill.

Demand & Spending

• Travel stocks - AirBNB, Booking, Expedia and Marriott all reported beats and confirmed uptrends in booking levels, not just for the US but also the Global Market. AirBNB reported a return to pre-pandemic levels and is seeing people use their properties while they “work from home”.

• Simon Property Group - the jump in stock price says it all! David Simon: "Occupancy gains continued, retailer sales accelerated, including our owned brands, and cash flow increased. Based upon results to date and expectations for the remainder of 2021, we are once again increasing full-year 2021 guidance and raising our quarterly dividend." Retail spending is coming back with a vengeance!

• Square had less than stellar performance because of a decline in their Cash App profits. The analyst consensus is that the decrease in stimulus checks is impacting them.

Around the Markets

• Pfizer’s now come out with their own pill for the treatment of Covid-19, just as Merck had announced last month. This is a game changer as far treatment options go, since they can be taken at home, instead of going to a hospital.

• Square will now allow the cash app to be used by teenagers. This is a massive opportunity for the company to grow with the demographic.

The Week Ahead

Rivian IPO - expected Wednesday Nov 10, 2021

• Rivian increased their pricing from $57-$62 to $72-$74! Optimistic indeed.

• The projected market cap is now $64B… and it’s apparently larger than Honda!!

• Amazon has a 20% stake in the company and Rivian has an agreement to deliver electric delivery vans for Amazon. Ford also happens to be a major backer.

Earnings

Some interesting earnings coming up next week.

Closing Thoughts

What a week! Everything this week simply tells me that the bulls are firmly in control and are not going to give in easily. Tom Lee revised his expectations for the S&P still further to 4800 and even went so far as to say, the market could achieve 5000. It remains to be seen if the market may run out of steam before reaching that lofty goal.

With companies still beating earnings, I think we will still see some positivity until the tapering actually starts later this month, and then the market probably consolidates.

Here’s wishing you a happy weekend and safe investing. 

Sincerely yours,

Ayesha Tariq, CFA

@ayeshatariq

There’s always a story behind the numbers

None of the above is Investment Advice. I may or may not have positions in any of the stocks mentioned. I have a long position in $SQ, $BRK-B as of the date of publication of this newsletter. I have no affiliation with any of the companies that are mentioned.